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Tesla issued additional shares for funding giga factories and battery cell production in Germany
and Texas, according to CNBC and Reuters this represented just 1% of its total market cap.
Since market cap is equal to the Price of shares * quantity of shares, with this move Tesla
added to its market cap artificially 2 billion and 5 billion, in total $7 billion. Although its shares
price reduced a little bit following announcement, increasing the number of shares enabled tesla
to boost its market cap artificially.
Other car manufacturers, including Ford, General Motors, Ford, Hyundai and Toyota did not
employ such method of boosting market cap. However, it was used by NIO, a Chinese electric
car manufacturer that issued additional shares with a total value of $5 billion.
Tesla has also introduced a number of new products in the last three years, which
suggests that the company is actively pursuing market expansion and diversification
activities. Detailed products are as follows:
Source: Tesla’s new product map
Stock Split 2 times (5-1 and 3-1)
Source: created by the author based on the figures provided by CNBC, Factset
According to CNBC, Tesla’s first stock split of 5-1 enabled the company to increase its market
cap by 12% in a single day. The second split was used to divide the stock in 3 parts, but it was
not very effective in increasing the market cap.
If we compare this decision to its competitors, it was only Toyota that split the stock in 2021
and resulted in about 16% announcement returns. NIO, General Motors and Daimler did not
use such strategy, suggesting that other automotive companies might have underperformed
tesla solely due to the decision not to split the stock.
Game Theory Matrix for analyzing the decision to split or not to split
Tesla’s decision to split the stock can be evaluation through the lens of game theory.
Players
Tesla (one) and its competitors (plenty)
Strategies
Split stock
Do not split the stock
Payoffs
While we do not provide explicit payoffs to each players, we provide our reasoning to
justify our argument why Tesla split its stock and most of its competitors did not.
Tesla split its stock because it had a huge price run-up in 2020. It definitely knew that its
competitors would not split the stock because their shares were not skyrocketing as much
as Tesla’s did. On top of that, most of its rivals were mature companies that split their
stock throughout their long history in the automotive industry. Thus, tesla took advantage
of this and took a decision to award 5 shares for each share investors held in the firm.
This resulted in even more upward pressure on Tesla’s stock price, which is definitely
what Elon Musk intended to achieve. If tesla hadn’t split their stock, this would have
made their equity seem expensive compared to the other players in the market and raise
signals of potential overvaluation. With low stock price, Tesla encouraged retail investors
to buy shares and thus boost its value even higher.
Thus, the final outcome was that Tesla split its stock twice while absolute majority of its
competitors (with the exception of Toyota), did not split their stock
Strategic decision to join S&P 500 index
There are 3 major automotive companies that were listed on S&P 500: Tesla, General Motors
and Ford. Ford was added in 1957, so its not very informative. General Motors gained 13% after
being included in the S&P 500 index in 2013, while NIO’s returns equaled 9% when it joined
Heng Seng Index.
Joining S&P 500 is a strategic choice which builds upon previous strategic choices. Tesla
couldn’t have made it this far had they not pursued aggressive production and introduction of
new cars because one of the requirements to join S&P 500 is to have a positive net income.
Inclusion in the S&P 500 had an impact on Tesla in two following ways:
1. Since many mutual funds and hedge funds that replicate the performance of S&P 500
hold investments in respective companies, they had to invest in Tesla post-
announcement to have their portfolio tracking S&P 500. These funds include Vanguard,
Fidelity, Blackrock, and State Street who have more than $1 trillion assets benchmarked
against S&P 500.
2. Joining S&P 500 enables the firm’s stock to improve liquidity and ease of trade. It also
enables derivatives traders to design and structure derivatives products more efficiently.
This graph shows that most of the ETF and index fund investors bought Tesla’s stock the day
before it was included in the S&P 500. According to Bloomberg, investors tracking S&P 500 had
to buy 78$ billion Tesla’s stock to rebalance their portfolio. This clearly suggests that Tesla’s
market cap increased relative to other firms partly due to its inclusion in the index during the last
3 years.
Explaining the Strategic Decision to join S&P 500 through Brand Perception Map